Chapter 3

Political Economy and Economic Development

What Determines A Countrys Level Of Economic Development?

Gross national income (GNI) per person measures the total annual income received by residents of a nation
Japan, Sweden, Switzerland, and the U.S. have high GNI China and India have low GNI

GNI can be misleading because it does not consider differences in the cost of living
need to adjust GNI figures using purchasing power parity (PPP)
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How Do Countries Compare On GNI?

Economic Data for Select Countries

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What Determines A Countrys Level Of Economic Development?

Official figures can also be misleading because they do not account for blackmarket economy transactions In addition, GNI and PPP data are static and do not consider economic growth rates
So, while China and India are currently categorized as being poor they are growing more rapidly than many developed nations and are expected to become among the largest economies in the world
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How Do Countries Compare On Growth Rates?

Economic Data for Select Countries

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What Determines A Countrys Level Of Economic Development?

Nobel-prize winner Amartya Sen argues economic development should be seen as a process of expanding the real freedoms that people experience
the removal of major impediments to freedom like poverty, tyranny, and neglect of public facilities the presence of basic health care and basic education

Amartya Sen also claims that economic progress requires the democratization of political communities to give citizens a voice

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What Determines A Countrys Level Of Economic Development?

The United Nations used Sens ideas to develop the Human Development Index (HDI) which is based on
life expectancy at birth educational attainment whether average incomes are sufficient to meet the basic needs of life in a country

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How Do Countries Compare on Economic Development?

Economic Data for Select Countries

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How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurship are the engines of long-run economic growth
innovation includes new products, new processes, new organizations, new management practices, and new strategies entrepreneurs commercialize innovative new products and processes

Innovation and entrepreneurship help increase economic activity by creating new markets and products that did not previously exist
innovation in production and business processes result in more productive labor and capital further boosting economic growth rates
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How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurship require a market economy
there is little incentive to develop new innovations in planned economies because the state owns all means production and therefore, the gains

There is a strong relationship between economic freedom and economic growth

the six countries with the highest ratings of economic freedom from 1975 to 1995 were also among the highest for economic growth
Hong Kong, Switzerland, Singapore, the United States, Canada, and Germany

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How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurship require strong property rights
without strong property rights, individuals and businesses risk having their innovations and potential profits stolen

Economist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth

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How Does Political Economy Influence Economic Progress?

Democratic regimes are probably more conducive to long-term economic growth than dictatorships, even the benevolent kind
property rights are only secure in well-functioning, mature democracies

Subsequent economic growth leads to the establishment of democratic regimes

South Korea Taiwan

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How Does Geography Influence Economic Development?

Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based economic systems, and the economic growth they promote Jeffrey Sachs studied economic growth rates between 1965 and 1990 and found that
landlocked countries grew more slowly than coastal economies being totally landlocked reduced a countrys growth rate by 0.7% per year tropical countries grew more slowly than countries in temperate zones

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How Does Education Influence Economic Development?

Countries that invest in education have higher growth rates because the workforce is more productive
countries in Southeast Asia have offset their geographical disadvantages by investing in education
Indonesia, Malaysia, and Singapore

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How Is The Political Economy Changing?

Since the late 1980s, two trends have emerged 1. Democratic revolution (late 1980s and early 1990s)
democratically elected governments replaced totalitarian regimes more committed to free market capitalism

2. A move away from centrally planned and mixed economies

more countries have shifted toward the marketbased model
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How Is The Political Economy Changing?

Trend 1: Democracy has spread over the last two decades
many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations new information and communication technologies have broken down the ability of the state to control access to uncensored information economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms

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How Is The Political Economy Changing?

Author Francis Fukuyama argues that the new world order will be characterized by democratic regimes and free market capitalism But, political scientist Samuel Huntington argues that while many societies are modernizing they are not becoming more Western
predicts a world split into different civilizations these civilizations will be in conflict with each other
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How Is The Political Economy Changing?

Trend 2: The spread of market-based systems
more countries have moved away from centrally planned and mixed economies toward the market-based model

Command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries

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What Is The Nature Of Economic Transformation?

The shift toward a market-based system involves
deregulation removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate privatization - transfers the ownership of state property into the hands of private investors the creation of a legal system to safeguard property rights
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What Does The Changing Economy Mean For Managers?

Markets that were formerly off-limits to Western business are now open
firms need to explore opportunities in these markets

Despite being underdeveloped and poor, some markets have huge potential
China -1.2 billion people India 1.1 billion people Latin America 400 million potential consumers

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What Are The Implications Of Political Economy Differences For Managers?

Countries with democratic regimes, market based economic policies, and strong property rights protection are more likely to have higher sustained rates of economic growth
these markets are more attractive to international businesses the benefits, costs, and risks of doing business in a country are a function of the countrys political, economic, and legal systems

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What Are The Implications Of Political Economy Differences For Managers?

The benefits of doing business in a country are a function of
the markets size the purchasing power of its consumers their likely future wealth

By identifying and investing early in potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country
China

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What Are The Implications Of Political Economy Differences For Managers?

The costs of doing business in a country are a function of its
political system
is it necessary to pay bribes to get market access?

economic level
are the necessary supporting business and infrastructure in place?

legal system
it can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights
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What Are The Implications Of Political Economy Differences For Managers?

The risks of doing business in a country are a function of
Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
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How Can Managers Determine A Markets Overall Attractiveness?

Country Attractiveness

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